Surety Defenses

Question 1

The surety’s “direct” defenses are

Answer 1

defense that relate to the formation of the contract

Question 2

surety may raise “derivative” (vicarious) defenses

Answer 2

debtor’s contract defenses

Question 3

The debtor’s defenses that may be raised by the surety in an enforcement action by a creditor include:
(4)

Answer 3

1. fraud or duress (debtor/creditor to surety)
2. illegality or impossibility
3. non performance by creditor
4. running of Statute of Limitations

Question 4

What debtor defenses can surety not raise?

Answer 4

1. debtor’s lack of capacity

2. debtor’s discharge in bankruptcy

Question 5

Acts Causing Discharge of the Debtor

3

Answer 5

1. Debtor’s performance of its obligation to Creditor discharges both Debtor and Surety
2. Creditor’s release of Debtor discharges Surety to the extent of the release
3. Tender of performance by the surety

Question 6

When is surety not released by debtor discharge?

Answer 6

(a) reserve the creditor’s recourse against the surety
AND
(b) preserve the surety’s recourse against the principal debtor

Question 7

Discharge of the underlying obligation in Debtor’s bankruptcy proceedings will have what effect on surety?

Answer 7

None

Question 8

If a creditors acts or conducts increase risk to surety, effect?

Answer 8

If creditor is aware of surety, then surety is discharged of obligations to extent of increased risk

Question 9

The surety may be discharged and may have a cause of action against the creditor if the creditor acts in any way to increase the surety’s risk of loss by:
(2)

Answer 9

1. increasing the surety’s cost of performance

2. decreasing the ability of debtor to perform

Question 10

Specific ways creditor may impair surety’s status?

Answer 10

1. release of debtor (also releases surety)
2. impairment of collateral
3. Extension of Time (if extension causes surety to suffer a loss)
4. Modifications to the principals contract
5. Delay in Enforcement of creditors debt on debtor

Question 11

If the underlying obligation is secured by a security interest in collateral and the creditor impairs the value of that interest:

Answer 11

then the surety is discharged of obligations to extent of change in value

Question 12

If the debtor and the creditor agree to a modification (other than an extension of time or a release of the principal), the surety under the modern view

Answer 12

Compensated surety: The surety is discharged from any unperformed duties if the modification imposed risks on the surety that imposes risks that are fundamentally different than those originally imposed
-Uncompensated surety will be discharged by any change

Question 13

When debtor performs an obligation to creditor and the creditor unreasonable refuses debtor’s performance, what is the result to surety?

Answer 13

Surety is discharged to the extent performance would have discharged the debtor’s obligaiton

Question 14

If debtor tender’s cash to creditor and it is refused?

Answer 14

Thee refusal of cash tendered is per se unreasonable,

E.g. a bank’s refusal to accept the debtor’s $15,000 cash payment will discharge the surety of $15,000 of her liability as a surety

Question 15

When surety performs an obligation to creditor and the creditor unreasonable refuses debtor’s performance, what is the result to surety?

Answer 15

Will discharge the surety to the extent that the refusal of tender causes the surety a loss.

E.g. A creditor’s refusal of the surety’s tender will cause the surety to lose the interest that otherwise would have been earned on the money. Thus, the surety will be discharged of his obligation to the extent of interest.